Selected Value Types & Valuation Methods

For the purposes of our work of expressing the RealValue of Natural Capital we narrowed down the value types and valuation methods applicable to establishing the the higher and better use of real assets and valuation of Nature's Core Benefits. Before we dive into the our selected types and methods we must clarify:

Why we are NOT using DCF and NPV

Several frameworks, particularly those in financial and economic disciplines, rely heavily on Discounted Cash Flows (DCF) Analysis or Net Present Value (NPV) Comparison for valuation. However, these methodologies are not suitable for calculating RealValue for several reasons.

Time Sensitivity

Our approach focuses on capturing the RealValue at a specific point in time. This is critical for understanding both the current ecosystem function and condition, as well as assessing actionable interventions. DCF and NPV, in contrast, lean on projections extending over multiple periods, such as 5, 10, or even 20 years. The longer the time horizon, the more susceptible these models are to errors and market volatility.

Accuracy and Manipulation Risks

DCF and NPV not only depend on forecasts, but they can also be sensitive to various assumptions, including discount rates. This leaves substantial room for error or even manipulation. With varying discount rates and projected cash flows, one can easily tailor DCF and NPV calculations to produce a value that aligns more with what is desired rather than what is accurate.

Focus on Immediate RealValue

Our RealValue Natural Capitalization Rate formula, which combines Net Operating Income (NOI) with Ecosystem Service Value (ESV), divided by the Real Asset Value, aims to provide a more immediate and tangible measure of value. This approach allows us to define specific interventions based on current ecosystem condition and the affects on value. After implementing these interventions, we can then re-measure RealValue to assess the actual impact on ecosystem functionality and asset value.

Complexity and Real-world Applicability

While DCF and NPV can be highly complex and demand a series of speculative assumptions, RealValue aims for simplicity and real-world applicability. The DCF model may involve complex calculations that require assumptions about future market conditions, cash flows, and discount rates. NPV, meanwhile, focuses strictly on financial returns and often neglects non-financial variables such as environmental impact, social values, and other intangibles that are increasingly important in today's investment landscape.

By avoiding the pitfalls associated with DCF and NPV, we believe the RealValue methodology offers a more accurate, actionable, and immediate understanding of an asset's worth and its impact on ecosystem function and condition.